The Tax Schedule
A Guide to Warranties and Indemnities

The rewritten corporation taxes acts of recent years have introduced a whole new set of statutory references with which tax practitioners have had to get familiar. Transactional documents have had to be updated and in addition, there have been some significant changes to the law, in particular in the Finance Act 2011, which all need to be reflected in the tax schedule.

The negotiations between tax advisors lined up against each other on the sale of a company or business can sometimes become so complex that the commercial reality of the transaction (a sale by a willing seller to a willing buyer) is lost. The purpose of the tax schedule is to determine where responsibilities and risks will lie following the completion of the transaction.

This book explains the underlying rationale of the key provisions of the tax schedule, and provides model long-form and short-form warranties and tax indemnities. These are also included on a disk, so that practitioners can download and adapt the model documents for their own transactions.

The intended readership of the book is tax lawyers, tax accountants, corporate lawyers, corporate advisors and finance directors who are involved in the process of the sale of a company.

 

Contents 1. THE TRANSACTIONAL PROCESS 2. DUE DILIGENCE 3. WARRANTIES 4. SALE AND PURCHASE OF A COMPANY 5. SALE AND PURCHASE OF A BUSINESS 6. SPECIAL SITUATIONS 7. SHARE SCHEME ISSUES 8. VENTURE CAPITAL SCHEMES 9. GROUP ISSUES 10. THE TAX SCHEDULE IN THE SALE AND PURCHASE OF A COMPANY APPENDICES 1. LONG FORM TAX SCHEDULE 2. SHORT FORM TAX SCHEDULE 3. LONG FORM TAX WARRANTIES FOR THE SALE OF A COMPANY 4. TAX WARRANTIES FOR THE SALE OF A BUSINESS 5. HMRC INFORMATION & INSPECTION POWERS 6. TIME LIMITS FOR ASSESSMENTS & CLAIMS 7. STATUTORY CLEARANCES 8. OVERVIEW OF HMRC APPROVED EMPLOYEE INCENTIVE SCHEMES 9. EIS OVERVIEW CHECKLIST 10. VCT CHECKLIST 11. PENALTIES AND ERRORS 12. DOTAS LEGISLATION 13. COMPANIES ACT 2006 – PART 28, CHAPTER 3 14. THE TAKEOVER CODE RULE

Table of contents. i

Glossary. xi

1.           THE TRANSACTIONAL PROCESS. 1

1.1.    Background Issues. 1

1.2.    Pre-completion Clearances. 1

1.2.1.      Section 138 TCGA – advance clearance for an exchange of securities for those in another company under section 135 TCGA.. 2

1.2.2.      Section 138A (4A) TCGA – election for section 138A TCGA treatment not to apply  3

1.2.3.      Section 138 TCGA – advance clearance for a scheme of reconstruction involving issue of securities under section 136 TCGA.. 3

1.2.4.      Section 138 TCGA clearance – advance clearance of a reconstruction involving transfer of a business under section 139 TCGA.. 4

1.2.5.      Section 162A TCGA (election for section 162 TCGA not to apply) 5

1.2.6.      Section 748 CTA 2010 and section 701 ITA advance clearance – cancellation of tax advantages from certain transactions in securities. 6

1.2.7.      Sections 1091 and 1092 CTA 2010 advance clearance for exempt distributions and payments  9

1.2.8.      Clearances for Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) 10

1.2.9.      Non-statutory clearances. 11

1.3.    Transactions and Clearances with EU Dimension.. 12

1.3.1.      Section 140A TCGA – transfer or division of UK business – clearance under section 140B TCGA.. 13

1.3.2.      Section 827 CTA 2009 – application for roll-over relief on a cross-border transfer involving intangible fixed assets. 13

1.3.3.      Section 140C TCGA – transfer or division of non-UK business. 14

1.3.4.      Sections 140E and 140F TCGA – merger leaving assets within or outside UK tax charge – clearances under section 138 TCGA.. 14

1.4.    Employee Share Scheme Matters. 15

1.5.    Buyer’s Issues. 15

1.6.    Seller’s Issues. 18

1.7.    Negotiating the Tax Schedule. 20

1.7.1.      Required background information. 20

1.7.2.      The purpose of the tax schedule. 21

1.7.3.      Clarity in the tax schedule. 23

1.7.4.      Negotiating tactics. 24

1.7.5.      No conflict with the SPA.. 26

1.8.    Completion Issues. 27

1.8.1.      Option and share scheme matters. 28

1.8.2.      Partly paid shares. 29

1.9.    Post-completion Matters. 29

1.9.1.      Approved share schemes. 30

1.9.2.      Roll-over options. 30

1.9.3.      Reporting for matters relating to options and shares. 30

1.9.4.      VAT degrouping issues. 31

1.9.5.      EIS issues. 31

1.9.6.      Degrouping and withdrawal of stamp duty land tax relief (SDLT) 31

2.           DUE DILIGENCE. 33

2.1.    Overview... 33

2.2.    The Buyer’s Tax Due Diligence Report. 34

2.3.    The Seller’s Tax Due Diligence Report. 36

2.4.    The Disclosure Process. 36

2.5.    Measuring the Risk. 39

2.6.    Due Diligence in the Purchase of a Business. 41

2.7.    Tax Due Diligence. 42

3.           WARRANTIES 45

3.1.    Overview... 45

3.2.    Warranties in Due Diligence. 45

3.3.    Disclosures against Tax Warranties. 47

3.4.    Administration and Tax Compliance. 49

3.5.    Accounts, Tax Computations and Payments. 51

3.6.    Advance Corporation Tax (“ACT”). 52

3.7.    Anti-avoidance. 54

3.8.    Associated Companies. 55

3.9.    Capital Allowances. 56

3.10. Chargeable Gains. 60

3.10.1.    Chargeable gains – single corporate entity. 61

3.10.2.    CGT – target leaves a group.. 62

3.10.3.    Chargeable gains – target a holding company. 63

3.11. Clearances. 65

3.12. Close Companies. 66

3.13. The Construction Industry Scheme (“CIS”). 70

3.14. Controlled Foreign Companies (“CFC”). 72

3.15. Corporation Tax. 74

3.15.1.    Quarterly instalment payment regime. 75

3.16. Demergers and Exempt Distributions. 76

3.17. Disclosure of Tax Avoidance Schemes (DOTAS). 78

3.18. Distributions and Dividends. 80

3.19. Dormant Companies. 81

3.20. Employment Related Tax Issues. 82

3.21. Group Issues. 88

3.22. Inheritance Tax. 88

3.22.1.    Insolvency Issues. 90

3.23. Intellectual Property. 91

3.24. Land and Property Issues. 94

3.25. Loan Relationships. 95

3.26. National Insurance Contributions (NICs). 98

3.27. PAYE.. 100

3.28. Penalties Regime. 102

3.29. Research and Development (R&D). 104

3.30. Residency issues. 107

3.31. Secondary Tax Liabilities. 108

3.31.1.    Company purchase tax avoidance schemes. 109

3.31.2.    Section 190 TCGA - Tax recoverable from another group company (“Section 190”) 111

3.31.3.    Secondary Tax Liabilities warranties. 112

3.32. Self-assessment. 113

3.33. Stamp Taxes. 117

3.34. Transfer pricing and non-arms length transactions. 124

3.34.1.    Transfer Pricing Warranties. 127

3.35. Value Added Tax. 127

3.35.1.    VAT Group Issues. 128

3.35.2.    The Capital Goods Scheme (“CGS”) 131

3.36. Value shifting and depreciatory transactions. 133

4.           SALE AND PURCHASE OF A COMPANY. 137

4.1.    Background issues. 137

4.2.    Issues for the buyer. 138

4.2.1.      Valuation. 138

4.2.2.      Hive-downs. 139

4.2.3.      Funding the purchase price. 142

4.2.4.      Post-completion protection. 142

4.3.    Taxation issues for the seller. 143

4.3.1.      Capital gains for individuals. 143

4.3.2.      Capital gains for companies. 148

4.4.    Dealing with Target’s pre-completion debts. 150

4.5.    Accounts and Completion Accounts. 151

4.6.    Structuring the Consideration.. 152

4.6.1.      Cash consideration. 152

4.6.2.      Delayed consideration. 152

4.6.3.      Shares and securities (a share for share exchange) 153

4.6.4.      Earn-outs. 155

5.           SALE AND PURCHASE OF A BUSINESS. 161

5.1.    General Overview... 161

5.2.    Commercial Considerations. 162

5.2.1.      Apportionment of Consideration. 164

5.3.    Due Diligence. 167

5.4.    Tax Issues. 168

5.4.1.      Capital gains tax. 169

5.4.2.      Intangible assets. 173

5.4.3.      Stamp duty and stamp duty land tax. 174

5.4.4.      PAYE and employment-related issues. 175

5.4.5.      Inheritance tax. 178

5.5.    VAT and Transfers as a Going Concern (“TOGC”). 178

5.5.1.      Transactional issues relating to a TOGC.. 179

5.5.2.      VAT registration issues for a TOGC.. 180

5.5.3.      Requirements of a TOGC.. 181

5.5.4.      TOCGs involving land and buildings. 182

5.5.5.      Property rental business transferred under a TOGC.. 184

5.5.6.      Nominee sellers and buyers. 185

5.5.7.      VAT records and a TOGC.. 186

5.5.8.      VAT groups and TOGC.. 187

5.5.9.      Seller tax warranties for a TOGC.. 188

5.5.10.    Buyer warranties for a TOGC.. 189

6.           SPECIAL SITUATIONS. 191

6.1.    Insolvencies and Administrations. 191

6.1.1.      Overview.. 191

6.1.2.      Taxation issues during insolvency proceedings. 195

6.1.3.      Transactional issues. 198

6.1.4.      Pre-packaged administration. 202

6.2.    The locked box mechanism... 203

6.3.    Public Listings and Offerings. 205

6.4.    Partnerships. 206

7.           SHARE SCHEME ISSUES. 209

7.1.    Overview... 209

7.2.    Corporation tax relief – a important negotiating issue. 214

7.3.    Tax issues arising in respect of Share Incentive Schemes. 218

7.4.    Roll-over options. 220

7.5.    Takeover Code Issues. 222

7.6.    Administrative and Reporting Requirements for HMRC Approved Schemes  224

7.6.1.      Approved CSOPs. 225

7.6.2.      SAYE Schemes. 225

7.6.3.      SIPs. 225

7.6.4.      EMIs. 226

7.7.    Partly paid shares. 226

7.8.    Disguised Remuneration Rules. 227

8.           VENTURE CAPITAL SCHEMES. 231

8.1.    The Enterprise Investment Scheme. 232

8.1.1.      Background.. 232

8.1.2.      Issuing company requirements. 234

8.1.3.      Investor eligibility for relief 236

8.1.4.      No connection with the issuing company. 237

8.1.5.      Unpaid directors. 238

8.1.6.      Investors becoming paid directors (‘Business Angels’) 239

8.1.7.      Investor receiving value. 240

8.1.8.      Qualifying share requirements. 241

8.1.9.      Annual limits on raising capital 242

8.1.10.    Issuing arrangements and use of the proceeds. 242

8.1.11.    EIS income tax relief 243

8.1.12.    CGT disposal relief 244

8.1.13.    CGT deferral relief 245

8.1.14.    Clearance procedure. 245

8.1.15.    Transactional issues. 247

8.2.    Venture Capital Trusts. 248

8.2.1.      Background.. 248

8.2.2.      VCT requirements. 248

8.2.3.      Investor reliefs. 253

8.2.4.      Transactional issues. 255

8.3.    Corporate Venturing Scheme (‘CVS’). 255

8.3.1.      Background.. 255

8.3.2.      Qualifying investing company. 257

8.3.3.      Qualifying issuing company. 257

8.3.4.      Trading activities requirements. 259

8.3.5.      Withdrawal of investment relief 260

8.3.6.      Loss relief 261

8.3.7.      Compliance statement and certificate. 261

8.3.8.      Transactional issues. 262

9.           GROUP ISSUES. 263

9.1.    Chargeable Gains Groups. 263

9.1.1.      Section 179 TCGA degrouping charge. 266

9.2.    Corporation Tax Groups. 268

9.2.1.      Group relief 268

9.2.2.      Consortium relief 270

9.2.3.      Denial of group relief and consortium relief 272

9.2.4.      Claims for group relief 273

9.2.5.      Surrender of tax refunds within a group.. 275

9.3.    Demergers and Exempt Distributions. 275

9.4.    Group Payment Arrangements. 277

9.5.    Intangible Assets. 278

9.5.1.      Intra-group transfers of intangible assets. 280

9.5.2.      Roll-over relief for intangible assets. 280

9.5.3.      Degrouping. 282

9.5.4.      Roll-over relief and the degrouping charge. 283

9.5.5.      Assets excluded from the intangible assets regime. 283

9.6.    Loan Relationships. 284

9.6.1.      Transfers of loans within a group.. 285

9.6.2.      Exempt distributions in respect of loan relationships. 286

9.7.    Stamp Duty. 286

9.8.    Stamp Duty Land Tax (SDLT). 287

9.8.1.      Restrictions for SDLT group relief 288

9.8.2.      Withdrawal of SDLT relief 289

9.8.3.      Reconstruction and acquisition SDLT reliefs. 291

9.8.4.      Withdrawal of reconstruction or acquisition relief 293

9.8.5.      Recovery of SDLT group relief from another group company. 293

9.9.    Substantial Shareholdings. 294

9.9.1.      Background.. 294

9.9.2.      Investor and investee SSE requirements. 295

9.9.3.      Joint Venture companies. 296

9.9.4.      Subsidiary SSE.. 297

9.9.5.      Disapplication of the SSE.. 298

9.9.6.      SSE degrouping issues. 299

9.10. VAT Groups. 299

9.10.1.    Background.. 299

10.         THE TAX INDEMNITY AND THE TAX SCHEDULE IN THE SALE AND PURCHASE OF A COMPANY  303

10.1. Background Issues. 303

10.2. Drafting Principles. 304

10.3. Short Form or Long Form Tax Schedule?. 305

10.4. Tax Liabilities. 306

10.4.1.    Actual and deemed tax liabilities. 307

10.4.2.    Arguing the treatment of tax assets. 308

10.4.3.    Tax repayments. 309

10.5. An Accounts Deal 309

10.6. A Completion Accounts Deal 310

10.7. The Seller’s Indemnity. 312

10.8. Limitations. 313

10.9. De Minimis and Maximum Caps. 315

10.10.   Third Party Recovery. 315

10.11.   Overprovisions. 316

10.12.   Reliefs and Savings. 317

10.13.   Mitigation and/or shared pre-completion Tax Reliefs. 318

10.14.   Buyer’s Indemnity. 319

10.15.   Conduct Provisions. 319

10.15.1.  Pre-completion tax issues. 320

10.15.2.  Completion Accounts. 321

10.15.3.  Straddle period tax returns. 321

10.15.4.  Conduct of Claims and Tax Disputes. 322

10.16.   Gross-up and Withholdings. 323

10.17.   Zim Properties. 324

APPENDICES. 327

1.           LONG FORM TAX SCHEDULE. 329

2.           SHORT FORM TAX SCHEDULE. 369

3.           TAX WARRANTIES FOR A COMPANY. 381

3.1.    Administration and Tax Compliance. 381

3.2.    Accounts Tax Computations and Payments. 382

3.3.    Advance Corporation Tax (“ACT”). 382

3.4.    Anti-avoidance. 383

3.5.    Associated Companies. 383

3.6.    Capital Allowances. 383

3.7.    Chargeable Gains. 384

3.7.1.      CGT – target leaves a group.. 385

3.7.2.      CGT – target a holding company. 386

3.8.    Clearances. 387

3.9.    Close Companies. 387

3.10. The Construction Industry Scheme (“CIS”). 388

3.11. Controlled Foreign Companies (“CFC”). 389

3.12. Corporation Tax. 389

3.13. Demergers and Exempt Distributions. 390

3.14. Disclosure of Tax Avoidance Schemes (DOTAS). 390

3.15. Distributions and Dividends. 391

3.16. Dormant Companies. 391

3.17. Employment-Related Tax Issues. 391

3.18. Group Issues. 394

3.19. Inheritance Tax. 394

3.20. Insolvency. 394

3.21. Intellectual Property. 395

3.22. Land and Property Issues. 396

3.23. Loan Relationships. 397

3.24. National Insurance Contributions (NICs). 397

3.25. PAYE.. 398

3.26. Penalties Regime. 398

3.27. Research and Development (R&D). 399

3.28. Residency issues. 399

3.29. Secondary Tax Liabilities. 399

3.30. Self-assessment. 401

3.31. Stamp Taxes. 402

3.32. Transfer Pricing. 403

3.33. Value Added Tax. 404

3.34. Value shifting and depreciatory transactions. 407

4.           TAX WARRANTIES AND INDEMNITIES FOR A BUSINESS. 408

4.1.    Stamp duty and stamp duty land tax. 408

4.2.    PAYE and employment-related issues. 408

4.3.    Inheritance tax. 409

4.4.    Seller tax warranties for a TOGC.. 409

4.5.    Buyer warranties for a TOGC.. 411

5.           HMRC POWERS. 413

6.           STATUTORY CLEARANCES. 415

7.           OVERVIEW OF HMRC APPROVED EMPLOYEE INCENTIVE SCHEMES. 420

7.1.    Approved Share Incentive Plans (“SIPs”). 420

7.1.1.      Taxation issues. 420

7.1.2.      Eligibility and other requirements. 423

7.1.3.      Administrative issues. 424

7.2.    Approved Company Share Option Plans (“CSOPs”). 425

7.2.1.      Taxation Issues. 426

7.2.2.      Eligibility and other requirements. 427

7.2.3.      Administrative issues. 428

7.3.    Enterprise Management Incentives (“EMIs”). 428

7.3.1.      Taxation Issues. 429

7.3.2.      Eligibility and other requirements. 429

7.3.3.      Administrative Issues. 431

7.4.    Approved SAYE Option Scheme. 432

7.4.1.      Taxation Issues. 432

7.4.2.      Eligibility and other requirements. 433

7.4.3.      Administrative Issues. 435

8.           EIS OVERVIEW CHECKLIST. 436

9.           VCT CHECKLIST. 441

10.         PENALTIES AND ERRORS. 443

11.        DOTAS legislation.. 444

12.        COMPANIES ACT 2006 – Part 28, Chapter 3. 446

Index  455